Financial News and Advice in Singapore

How to Save Money for a Flat Before Your 35th Birthday

Saving S$200,000 for a flat in Singapore seems like a monumental feat. But if you start now, you’ll be able to afford it by your 35th birthday.

We know what you’re thinking: how can you possibly scrape together S$200,000 or S$300,000 for a flat by the time you’re 35? It’s impossible. But countless Singaporeans have done it, and some even in their early 30s.

1. Ensure That Your CPF Contributions are In Order

Your CPF contributions, especially your employer’s 17% top-up, are critical to buying your first home. When you take out an HDB loan, you can only borrow up to 90% of the flat’s price. The remaining 10% must either be in cash or from your CPF.

So if you are buying a flat that costs S$200,000, you must have at least S$20,000 in cash for the down payment. If you haven’t accumulated this amount in your CPF, it can be painful to part with it from your bank account.

In addition, costs like the conveyancing fees (legal paperwork) and fire insurance can also come from your CPF. Monthly loan repayments can also come from your CPF. The alternative is to pay for all of these out of your own pocket.

If you’re thinking of evading your CPF, don’t. What you are doing may be illegal, and you’re only cheating yourself in the long run. You can check your CPF online with your Singpass.

2. Save At Least 20% of Your Income, Even After CPF

There are two reasons for doing this. First, it is a contingency in case your CPF is insufficient for the down payment, or if HDB does not extend you the full 90% loan (this sometimes happens). The savings will make up for the difference in cash.

Second, your savings exist to prevent debt. Should you encounter some kind of financial emergency, such as needing to find a new job or needing surgery, your savings will tide you over.

If you don’t have savings, you’ll probably have to resort to loans. This affects your DSR and afflicts you with interest repayments.

3. Get an Endowment Plan or Blue Chip Programme

An endowment plan is an insurance plan with a savings component. Besides giving you insurance coverage, an endowment plan pays out a lump sum after a given period (e.g. 15 years).

Many people use endowment plans to fund something specific, such as a University education, a car, or the down payment on their first home. Most endowment plans grow your money at around 3 – 5% interest, which is much higher than a bank’s fixed deposit.

Alternatively, you might consider a blue chip programme, which can be bought at banks such as OCBC and POSB. The cost can be as low as S$100 per month.

Rather than pick specific blue chip companies, you may want to keep it simple by just buying a Straits Times Index Fund. The returns from ST Index funds are pegged to the ST Index, and due to low management fees may earn higher returns than endowment plans.

Speak to a financial advisor or wealth manager before investing.

It is inadvisable to hoard the money in a regular bank account and wait for 10 or 15 years. Regular accounts typically have an interest rate of around 0.125%, so you will effectively “lose” money after factoring in inflation.

4. Don’t Buy a Car Before You Buy a Flat

When you purchase a flat, the lender (be it HDB or a private bank) will take into account your Debt Servicing Ratio (DSR). This measures your debt obligations against your income.

If you earn S$5,000 a month, for example, and you have debts totalling S$2,500, you would have a DSR of 50%.

With rare exceptions, you will not be granted a loan if the repayments would raise your DSR above 60%. You will either have to apply for a smaller loan (which can mean not getting the house you want), or clear out your debts before trying again.

For this reason, do not buy a car just before buying a flat. The five-year car loan is expensive, and will contribute so much to your DSR that you’ll have a tough time getting a home loan.

5. Do Not Accumulate ANY Credit Card Debt

Credit cards in Singapore can be great tools for saving money if you use them right. That means making full repayment every time. If you maintain rollover debt (you don’t pay credit card bills in full), two things can happen.

The first is that all your savings and investments, be they endowment plans or fixed deposits, will be wiped out to pay the high interest on your credit card. It is almost impossible to “out-save” the credit card interest rate of 24% per annum.

Second, if you are late with credit card repayments – or have a history of only making minimum repayments – this will affect your credit rating. Both banks and HDB may choose to grant your smaller loans, or refuse to give you loans altogether. Your history with credit cards does impact your chances of buying a flat.

6. If You Can’t Avoid Going Into Debt Before Buying A Flat, Be Very Stingy

You may not have a choice about debt. Sometimes you will need an education loan, or a loan for family reasons.

If this happens, you must be extremely stingy. Nitpick over details, such as administrative fees, and compare loan options extensively to get the lowest rate.

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By Ryan OngRyan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.

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